Alex Tabarrok’s piece at Marginal Revolution about the bad economics of layaway makes sense on one level. It got all the appropriate and expected twitter hits this morning (Yglesias, Klein, etc). I’m not going to argue against the the post on its merits. Layaway exists as a way to transfer money from people to corporations, it is a bad economic investment for the consumer, etc. Tabarrok can’t figure out why people would agree to do this–stores rarely run out of goods and if they do they are replaced with something else, it’s a big pain to make the payments, etc. And I agree that Consumer Reports probably shouldn’t be calling layaway a good idea.

But like so many ultimately well-meaning articles about the poor I read on the internet, it’s seems to me that Tabarrok doesn’t understand layaway because he’s never been poor (although I don’t actually know). Let’s imagine a situation for layaway. You are 11 years old. It’s July. Your family doesn’t have much money. Getting new school clothes is a big deal because you don’t get very many new clothes in a year and you want to wear them on the first day of school. Your parents are really worried about this. They want to buy you the new clothes. They also know that they will have a really hard time actually saving the money to purchase them all at once. So they put them on layaway at the Target or Walmart and make the payments, hoping to have them all paid off before school starts.

How would I come up with this scenario? Because I was that 10 or 11 year old and my parents used layaway to get me those new clothes I wanted. In fact, in the scenario I am recalling, they actually couldn’t make all the payments and I really wanted those clothes and somehow we talked the store into giving us some of the clothes up front and breaking up the layaway, which probably only worked because I was there and nearly hysterical that I would have to wear old clothes on the first day of school.

In a so-called rational economic world, layaway might not make sense. In the real world that actually people live and operate in it makes a ton of sense, even if it is bad economics. People can’t save money easily. It’s actually a more secure investment to pay some of it up front, which commits the individual to buying the product and makes acquiring it probable, but also gives the buyer some leeway if disaster strikes.

Economists try to understand why people make the decisions they do. The growing field of behavioral economics is mercifully bringing that back into the real world. What has driven the decisions of working-class people in the 20th century more than anything is a desire for security, broadly defined. Whether we are talking about Social Security, Medicare, the union contract that rolled over with few substantial changes except better benefits for 20 years, the ability to own a home after World War II, many of our major policy and labor decisions since the 1930s was driven by the desire for security now mobilized through the American labor movement. The CIO especially centered security as a broad goal and crafted policy to increase working-class security. And it worked, at least for members of the white male working-class, for several decades. Today it has mostly collapsed in an era of contingent labor, union busting, capital mobility, massive debt, and income stagnation.

But I don’t think the desire for security is just a broad policy goal in union offices in Washington, Congress, or the Department of Labor. It also drives people’s daily lives. The struggle to survive and to make ends meet is ultimately a struggle to find some level of security in your life. Sometimes, the desire for security might even drive behavior economists see as irrational. But layaway is a form of security for you to buy your 11 year old his school clothes. So on the fundamental level of seeing your child happy and your home at peace, layaway might be a perfectly rational decision.

What bothers me about articles like this is the lack of understanding of working-class behavior. Tabarrok can’t understand why people would use layaway. But it’s easy to gain that understanding. Ask some poor people why they use it.

Comments (237)

I can see why people think that, but lots and lots of economists seem to have forgotten that micro is supposed to be about understanding why people make decisions and that the rational actor model is just a convenient model, and instead come to take the rational actor model as primary and people’s decisions from it as aberrations. It’s a real shame.

This is very true. When I taught econ, I always framed it in terms of understanding why people allocate resources the way they do, which invariably disappointed at least some of the Randroid frat boys who think they have everything figured out. I’d always tell them that the field of economics as they understood it was almost completely useless for anything other than a quasi-intellectual justification for a political philosophy, thanks largely to the fact that economists hadn’t figured out how to mathematically model real-world behavior.

It was frustrating to say the least, because a lot of these people would give me negative evaluations as a result. And when you’re an adjunct, well, that has an impact.

You make a great point. We talked abt economics as the science of resource allocation on my 1st day of Econ 101 & never talked abt it once afterward. But its funny how it comes back. I was talking with friends abt the water situation in TX and how much water was going to fracking & that whole frame involved resource allocation.

Layaway is pretty different. Standard economic theory has no trouble explaining why poor people would spend part of their budget on little luxury goods. Layaway is hard to explain by the standard theory because it’s a saving mechanism that’s strictly worse than saving yourself at home, or at the bank.

You know what? I just today called my credit union (after several years) and changed my pointless 500 dollar balance interest checking to a basic checking. Thank you for saving me untold fees and hassles! for the doubtful joy of making 2 cents a month(if that) of “dividends”!

Many poor people do not have bank accounts and most of those who do do not have enough money in them to earn interest. More importantly, the income of the poor is inadequate to meet all their needs over the longer term. This means that saving for things like clothes is not a rational strategy since that money will be diverted to other immediate needs (car repairs, etc.) if it is not spent immediately. This is why layaway works for them and saving does not (you have to make regular payments on the layaway and that money is no longer available for other uses). It is not “good” economic policy, but it is effective in accomplishing its goals.

Even if you do have a bank account, layaway still might be better than saving.

Let’s say I commit to buying my son a PlayStation 3 for Christmas, it’s now September so I put aside money in my savings account.

On October 10th my car breaks down. Okay, where do I withdraw the funds to pay for that from? Oh, the PS3 fund. Sorry son.

At least with layaway I have some measure of commitment to the purchase and the money is out of my hands.

Yes it is irrational to some degree – Economic Man would say that the amount of money is the same in the end, and if PS3 gets bumped off the priority list then that’s the breaks – surely your son, being an Economic Man as well, would understand this. Thing is, maybe this is why econ 101 is such a crap way to look at the world. The world isn’t rational.

Let’s say I commit to buying my son a PlayStation 3 for Christmas, it’s now September so I put aside money in my savings account.
On October 10th my car breaks down. Okay, where do I withdraw the funds to pay for that from? Oh, the PS3 fund. Sorry son.

But with layaway, there’s no way for you to pay to fix your car, so you can’t get to work and you lose your job. But Christmas is saved!
Er…

Maybe it’s not your car. Maybe you already take the bus to work, but your mom’s car breaks down. Can you say no to your mom? Or your other son really really really really really really needs minutes on his phone. Or your ex showed up and rummaged through your purse because the kids don’t know not to let them in the door because you’re the bigger person and don’t say bad things about your ex in front of the kids.

The only time stores got rid of layaway was when they could push credit cards on people instead. And that’s way worse.

It is obviously valuable. When you live in a poor neighborhood, your savings can be ripped off. A bank will ream you out with fees and penalties if you give them half a chance, and the instability in a poor person’s life, putting money in the bank is just asking for trouble.

And nobody ever robbed the layaway ledger at Walmart or Kmart. It is expensive, but safe.

Well, the problem w/ the post–besides the fact that Tabbarok had no appreciation for being poor (or had forgotten)–is that it was an Econ 101 view. “Oh, look how dumb the poors are, they don’t even know they can make more interest by saving at the bank than by layaway!”

Well, had Tabbarok bothered to take Econ 201 he would’ve learned abt something called “cash flow” and how when its constrained, ppl–by which I mean poors, CFOs, and the Treasury Secretary–have to make all kinds of sub-optimal decisions. And as far as alternatives go–credit cards, pay day loans, loan sharks–its a damn good alternative.

The way the rich buy some luxury goods is even more interesting / irrational. I recall explaining the concept of Weblen goods to a poor sap who was mistreated by Ferrari. Why would you mistreat your own customer? He couldn’t understand.

Layaway turns money that could be and will be used for anything into a sunk cost – a terrible way of saving, but a good way of making sure big ticket items you need actually get purchased. It is fighting irrationality with irrationality.

It’s not fighting irrationality with irrationality. It’s making a mostly irrevocable decision about the purpose of the money. Thus, layaway is about human priorities.

When you live on the edge, it’s not just kids’ school clothes. It’s food, rent, and emergencies, not just for you but for the people around you. Someone in your family or circle may come up short and ask you for a loan. If you have a little pile squirreled away, you have to decide between your kids’ clothes or fixing your brother’s car. But if that pile is safely at Target, you can sincerely wave him off, knowing that you can’t repurpose the funds. Preserves your relationship with him (you would help if you could) and with the kids (they know they come first.)

I don’t even know that it’s fair to say they’d do something irrational with that money. When you have zero excess income, money coming in is quickly going to be going back out to replace that washer motor, fix your car when it breaks down, etc. There’s always somewhere money set aside is going to disappear to, and it isn’t irrational to spend it in those other ways.

It is not just zero excess income, it is negative excess income. While some poor people have enough money for routine day to day expenses, they do not have enough income to cover normal emergency expenses (car repairs, medical expenses, etc.).

To Brandon’s point, there are some ppl who, when they get their EITC refund, immediately spend it to pre-pay their rent for the next 6 months. Its their way of “banking” it on something they know they need so that it won’t get spent on something somewhat less important (everything being less important than rent). This isn’t “economically rational” in Tabarok’s absurdly constrained view of things, but its “home ec” rational.

Well, let’s just say it’s an effort to bind one’s future self, without labeling that future self as rational or irrational. Anderson in December may think he has other needs for that money, but Anderson in October thinks that the layaway is more important and says *fuck* future Anderson, that untrustworthy not-yet-existent bastard.

It’s kinda sad actually that the same Tabarroks who complain about poor impulse control by the poor, also complain when the poor adopt tactics to counter that poor impulse control. It’s like laughing at the handicapped when they try to use crutches.

“I never get enough sleep. I stay up late at night, cause I’m Night Guy. Night Guy wants to stay up late. ‘What about getting up after five hours sleep?’ ‘Oh that’s Morning Guy’s problem. That’s not my problem, I’m Night Guy. I stay up as late as I want.’ So you get up in the morning, you’re exhausted, groggy … oooh I hate that Night Guy! See, Night Guy always screws Morning Guy. There’s nothing Morning Guy can do. The only thing Morning Guy can do is try and oversleep often enough so that Day Guy loses his job and Night Guy has no money to go out any more.”

The extra zinger in Erik’s analysis is that the ability to bind your future self turns out to be a service worth paying for, and one the market can provide. I don’t think that idea appears in Rational Fools or The Reasons of Love.

That is an excellent descriptor. Depriving your future self of the option is a rational choice when dealing with a known scarcity problem. The brains can lie to us when we are stressed or have to make immediate decisions in suboptimal circumstances.

But like so many ultimately well-meaning articles about the poor I read on the internet, it’s seems to me that Tabarrok doesn’t understand layaway because he’s never been poor (although I don’t actually know).

I know people who’ve been dirt poor who still know nothing about poverty. However, the one uniting circumstance among them is their experience of poverty occurred during childhood. As adults, they then castigate the poor for not “escaping” poverty like they had (actually, like their parents had with substantial public investments and subsidies in the immediate post-war decades) in order to protect their own status from a perceived attack.

Tabarrok can’t understand why people would use layaway. But it’s easy to gain that understanding. Ask some poor people why they use it.

Sure. But an assumption integral to American-style capitalism prevents that from being pursued. And that assumption is: “If poor people had anything insightful or important to say about money and economics, then they wouldn’t be poor.”

I know people who’ve been dirt poor who still know nothing about poverty. However, the one uniting circumstance among them is their experience of poverty occurred during childhood. As adults, they then castigate the poor for not “escaping” poverty like they had (actually, like their parents had with substantial public investments and subsidies in the immediate post-war decades) in order to protect their own status from a perceived attack.

These people are dicks. Yes, if pressed some might admit that they’re secretly ashamed of having been poor and go in for a bit of poor-bashing as a pathetic attempt to blend in with their current economic peers. “Gee fellas, I sure do hate poor people, just like a normal not poor person would, right?” But they’re still dicks. (And fooling no one but themselves.)

Not quite the same circumstance, but pretty much. Grew up on Social Security checks because of the government, but proceeds to remind us all everyone who gets “government handouts” like SS and Welfare are just moochers.

And also like Rick Perry. Ted Cruz’ wife was the daughter of 7th Day Adventist missionaries, so maybe you throw in him as well (I don’t know any missionaries who aren’t poor). Dr. Ben Carson grew up poor as well & sounds like a complete dick.

Some ppl learn the lesson from coming up poor. They were taught that if they wanted to get ahead they had to work their ass off (which is a necessary, but not sufficient condition). They forgot that they also got help when they were working their ass off.

And my late mother-in-law, who made $2 million by outliving her parents, who made their money by owning land underneath a school district adjacent to Austin but not subject to a desegregation court order and long after she left home. She and my brother-in-law convinced themselves that the money represented some kind of reward for being moral instead of a windfall for being lucky.

Its funny how that works out. Have some distant relatives in TX whose grandfather had some old timberland he got on the cheap & just passed on down. Now timber companies pay them royalties & to talk to them you’d think they “earned it” while all those other ppl getting checks are “free loaders”.

Says you need a washing machine. An average person could slowly save $50 a month until they can buy the used thing you get off Craig’s list. A poor family? That $50 is going to get sucked into paying for cousin Joe’s car that needs a new carburator or new shoes for Sally bc she stepped into mud. Unless you literally can’t spend the money bc it’s gone, that money will absolutely disappear.

When I go back & visit my family I’m always shocked b/cs I’m old & those days are distant for me. I remember driving around pop’s old clunker for weeks until we had enuf to fix it. It was literally a death trap. Both doors were broken such that if you shut one the other would open. I took to entering by climbing through the window. At the same time the Front Passenger’s Side brake went out so that if you hit the brakes the car would lurch hard to the left; it was so strong it would literally pull the steering wheel out of your hand. The only way to brake was to tap it very lightly, very softly. And that meant you had to drive VERY slowly. Damn. That was back in the day.

Remember the old “assume a can opener” joke? I have spent the majority of my professional life dealing with economist expert witnesses. I was once actually scolded by my boss because, after listening to a three hour deposition in which the witness postulated all kinds of model purchasing behavior, I asked “does any real human actual DO that??!”

Perhaps we should start opening discussions about economics with the phrase “assume people are not always rational” and proceed from there. Seems to ample evidence for that. And I don’t think that’s (always) a bad thing. I wonder at someone who can begin a discussion with “I doubt the rationality of my fellow humans.” Really? Never mind Justin Bieber, you do know that some time ago the Pet Rock was a real thing? (to Tabarrok, not you).

Exactly. I read fashion magazines and love the entire subject. I own a number of quite expensive handbags and some nice jewelry. Those things are the most perfect illustration of irrational behavior I can imagine. I can’t eat a Coach purse; it doesn’t perform its function of holding things in place any better than a backpack or, well canvas sack, yet I love it and don’t regret the money I spent on that not being used for buying shares in Apple.

Of course, then he would say that because those things give you pleasure, the purchase was rational. Basically, it seems like they end up defining as rational “everything I like and that people like me like.” Sort of an opposite “No True Scotsman” fallacy. I mean, not to get too off topic, but if you spend money on a Justin Beiber concert and it gives you a memory you cherish throughout your life, how is that irrational? Not my thing, but good for you, and to be fair, I own my own set of bagpipes.

Basically, it seems like they end up defining as rational “everything I like and that people like me like.”

100% this. And so we get Great Sages arguing that people below a certain income level don’t deserve to be happy. Why? Because they’re poor! But they still have human needs and desires and one of those is – Too bad! They’re poor, they don’t get to have a basic human need fulfilled! Because logic!

I always assumed this was the critical divide between Right and Left currently. Us Leftist (if I may!) feel like people have a right to experience some happiness. On the Right, you need to “earn” it. And deserve any suffering you get because of your “poor choices”. Never mind that a lot of our positions in the world are determined by nothing more than luck.

But … that would mean that if a person had something that the Right didn’t think he’d earned (e.g. a nice home, a diploma from a well-regarded university, the Presidency of the United States), he or she could only have acquired it through some sort of chicanery such as theft, Affirmative Action or voter fraud.

Lots and lots of people have commented on the lack of empathy and unwillingness to be educated that are badges of honor on the Right. Even clueless upper-class lefties who struggle with the concept of No. Money. will listen if you correct some misconception about poverty and understand that being poor isn’t any fun and is something to be fixed. Or that it just isn’t Done to kick downward, or something that stops them from delighting in being cruel.

And deserve any suffering you get because of your “poor choices”.

Provided we understand that you does not include me. And so I get to squeal like a pig with his dick in a wringer if something bad happens to me and you had better be ready to do something to help me out. And don’t you dare call me a hypocrite!

Also the belief that there’s this magical, wonderful form of welfare for the Welfare Queens, Strapping Young Bucks and all those ‘other people’ to live lavishly on while us good, honest folk just need a bit of help now and then (aka the same welfare system they detest ‘others’ for using) but don’t get any

I understand what you are saying, but I don’t think this follows a pure left-right metric. There are paternalistic types of the left who are very suspicious of risk-taking by the poor (and support, for instance, prohibiting gambling on such grounds), and there are libertarians who don’t agree with social welfare programs (or support changing them to cash grants) but do think that the poor should be able to spend the money they earn how they wish to.

No not all of us. But, I do happen to think that radically restructuring societies through violence and coercion causes more suffering than it solves ultimately. I don’t think the poor are poor because of their own choices. Or that they deserve it. In fact hey would be less poor if the World Bank, IMF, and Obama administration were not Hell bent on imposing the type of neo-liberal economic policies in Africa that “progressive” Obama supporters claim to oppose in the US.

Actually, yes. At this point, “Rational” just means that you have transitively ordered preferences and you choose the option that you think is most likely to give you the most benefit given those preferences. There’s nothing in rational choice theory about the content of those preferences.

So, buying expensive handbags even when you can’t afford other things isn’t irrational if handbags make you happy. If you liked shoes more than handbags and bought a handbag instead of a pair of shoes, that would be irrational. (Or if you liked shoes more than handbags, handbags more than video games, and video games more than shoes.)

The thing is, almost always, there are hidden assumptions about what it is that is preferred in these types of articles.

It is a classic bait-and-switch: “I have this purely formal notion of rationality, who could object to intransitive preferences!” (people do object, but whatever). And then, implicitly: “Well, that is preferable to that, and to that, and to that.” And then explicitly: “You are irrational!”

I sold an old saxophone and an old accordion, neither of which I could play and neither of which I succeeded in giving away, on eBay 10 years ago for $1,500, which surprised me. The only antique musical instrument I ever heard of was a Stradivarius.

When our prof first presented that I had a lot of pushback as well. Two things got me over that & now I feel quite comfortable w/ the assumption. 1) It explains behavior in the aggregate, not at an individual level; 2) they’re “rational” as they themselves see it, ie at times its as subjective determination as it is an objective calculation.

Most of business school is actually a deep dive on #2. How do you market a product so that ppl believe a chosen product is in their best interest? How do structure incentives so that a distributor will think its in their interests to sell your product? etc.. The really cool stuff in economics is happening around #2 as well.

One thing about Coach bags is that they last a really long time; you won’t need to replace it every year or two. (Like buying shirts from Brooks Bros. instead of The Gap.) So if you have the money up front, you could well be saving money in the long run. Another valuable option not available if you’re poor.

Yeah this is why I bought a Fossil purse because I was tired of purses ripping and me having to buy new ones every year. I am hard on my purses. That Fossil purse was expensive as hell, but it is also still with me 5 years later and will probably last for 20 more.

I brought a Fuquandaishu purse at Kaneshie Market for 35 GH ($17) in August. It will probably last forever and I am not particularly gentle on it. But, the strap doesn’t look capable of breaking. It also has a cell phone pocket.

The Atlantic ran an article a month or so ago about the experience with check cashing places in NYC (with pay day loans illegal in NY, this is the closest you get to one). Where she ended up realizing that the reason that people go there is for all the personal touches as well as the fact that due to bank fees, check cashing places may actually make sense economically.

Layaway certainly has problems, and people who have the luxury and wherewithal to save their money on their own are wise to avoid it. But, as it is basically an interest free [reverse] loan, it makes plenty of economic sense for some.

Which is basically the libertarian argument in favor of check-cashing stores – the poor are unbanked because banks won’t open branches in poor neighborhoods, and check-cashing stores are all they have.

This was about being working poor, not being “homeless” but I really liked Ehrenreich’s Nickeled and Dimed because she *did* listen to and report what her fellow, actual poor people colleagues at her various jobs were saying and what their lived experiences were.

Yea, that book wasn’t good just because she listened. She was around long enough and at enough jobs to get a feel for the place. She also because she placed strict rules on herself – like, for example, she couldn’t just go and withdraw money from her regular banking account in an emergency. IIRC

Having read the piece, I can say that this man is yet another condescending fucktoad who (surprise of surprises) doesn’t speak to anyone who actually uses layaway. I mean, ewww. Poor people.

Still not convinced? In the spirit of Tabarrok’s Wager I offer Tabarrok’s Layaway Plan.

Send me $10 right away along with a message telling me what you want, when you want it and the current price. Save your money. If you save enough to buy the good at the requisite time send me a note and I will heartily congratulate you with a $10 reward. If you don’t save enough, thanks for the $10 and better luck next time.

Har har har! Int that a kneeslapper? Dick.

What irks the shit out of me about pieces like this is they are ultimately asking “Why do poor people buy anything except the barest necessities?”

I mean, my siblings and I didn’t need Christmas presents when we were kids so my mom didn’t need to use layaway to purchase them, so obviously the whole thing is stupid. She should have given us oranges and a loving talk about fiscal prudence on Xmas day.

Whereas a middle-class person who runs up a huge credit card debt with killer interest fees to stack presents under the Festivus pole is a perfectly rational actor. Because … they aren’t poor. (Yet.)

By the way, another reason to use lawaway (per my mom): If you live in an apartment or otherwise don’t have a space or spaces that can be secured from nosy kids, it is a great way to make they don’t accidentally and totally not on purpose find their presents before the Big Day.

The poor and those receiving any form of public assistance should be living meager, grinding existences devoid of any form of enjoyment or luxury. How else will they have any motivation to escape poverty?!

This same sort of cutesy talk laced with sarcasm/contempt is quite common among pop economics writing. NPR’s Marketplace is the master of it. It makes me want to drive off a cliff whenever I hear those jerks having a jokey dialogue about warmed-over neoliberal pablum.

What bothers me about articles like this is the lack of understanding of working-class behavior.

True, but the blind spot is even bigger than that, I think. In this case it’s a refusal to understand some really basic social-psychological ideas. One controls and manages one’s life by making potentially costly-to-violate precommitments to others. Acknowledging this perfectly ordinary life management strategy doesn’t even require abandoning their rational actor model; it just requires a slightly more complicated version of it.

Acknowledging this perfectly ordinary life management strategy doesn’t even require abandoning their rational actor model; it just requires a slightly more complicated version of it.

Is what’s happening here that Tabarrok is making an argument for abandoning the rational actor model, and LGM consensus is defending its applicability in this case? Because that is not the way most people generally assume this sort of thing typically works.

His assumption that the “goods will always be there” is also faulty. A lot of layaway is people buying goods at after-Thanksgiving sales or buy the latest electronic gizmo for their child for Christmas.

Clothes will almost certainly not “always be there,” as retailers bring in new items and mark old items down to make room for them in a matter of a few weeks. Even if the clothes stayed on the rack long enough for people to save they might not be the right size or color.

It’s not just poor people who need things like this. Plenty of middle class and even wealthy people just can not manage their finances at all and use these types of economically inefficient, forced savings tools to compensate for that. It’s no different than people who deliberately use fewer withholding deductions than they’re entitled to so they get a big tax return.

My wife’s sister and her soon-to-be-ex have two huge houses, no mortgages and still manage to live paycheck to paycheck.

The problem with economists is not so much that they don’t understand poor people. It’s that they don’t understand people who don’t understand economics.

After the uprising of the 17th June
The Secretary of the Economist’s Union
Had leaflets distributed in the Midway
Stating that the people
Had forfeited the confidence of the economists
And could win it back only
By redoubled efforts.
Would it not be easier
In that case for the economists
To dissolve the people
And elect another?

That was the lesson in my first big public policy class & its amazing how often I preceded to forget it afterward. There’s a weird combination of childish joy & hubris involved in thinking you’ve hit upon some Grand Unified Theory & for many of us its experience that teaches us that GUTs usually suck.

As someone whose parents have had (and still do, moving into old age) live day to day with little to no savings for retirement, I’ve seen exactly the situation you’re describing for as long as I can remember. Yeah, it isn’t rational, but when people’s lives are literally a torrent of continuous irrationality and the system fucking them nonstop, layaway doesn’t seem like a bad idea to immediately get something. “Saving up” doesn’t work for people living in poverty; that money that was there to buy little Johnny his new gameboy may be gone tomorrow due to an unfortunate happening and a need to put food on the table. I’m sorry that you and I had to live like this Erik. Further, it is a goddamn travesty that we as a society allow stuff like this to go on. As if people living in poverty don’t have enough on their plate, adding on predatory business practices pushes it way over the line.

It is one of my pet peeves too. We live near a street that is in a slowly gentrifying neighborhood but still has the “rent a center” and the pawnshop and the payday loan place, all in a row. My partner calls them “poverty pimps”.

Heh, you should come to England, where those kind of places are slowly crawling over the land like a plague. There’s a building in Portsmouth called “Prudential House” – used to be an office for an old-style life-insurance/savings-plan company. The ground floor is now occupied by 2 betting-shops, a pawnbroker and a cheque-casher. You couldn’t make it up.

In my parent’s neighborhood there’s a guy, Mike, who owns 2 stores side-by-side. The one on the left is a Pawn & Gun Shop, and the one on the right is a Liquor Store. When Mike first built it & I had to take a picture & post it on FB just so my friends would believe me. I joked, “How synergistic of Mike! Now people can trade in granddad’s old gold watch for a gun & go right next door & knock off the liquor store. Win win!”

My parents weren’t even poor (dad had a good factory job, back in the day when they would even talk about being able to double-dip on health insurance) and we bought things on layaway. Some people just aren’t that good with money. Doesn’t make them bad people or deserving of hardship or anything else. They may say “I’ve tried to save on my own, and never succeeded. I can put it on layaway and pay the price, or get a credit card.” In that case layaway makes sense.

He just seems to assume that everyone can be as good with money as he is. I’m a private music teacher; believe me, it sometimes drives me nuts when a student can’t just “get” something that now comes easy to me. But since I am a teacher, my response is not “ho ho, you stupid student, why don’t you just pick up the saxophone and play that concerto! Watch me – it’s easy! In fact, I’ll give you $10 if you do!” Some people just aren’t good at what you’re good at and need some help to do it. Telling them, they’re dumb just kind of makes you a jerk, in my opinion.

That’s kind of misrepresenting what he’s saying. If a theory predicts that people act a certain way and they don’t act that way, then that disproves the theory. But if a system says that people should act a certain way, then the fact that they don’t act that way doesn’t imply that the system is wrong. People do in fact do things they shouldn’t do all the time.

Tabarrok is making the latter argument. He’s not saying that he has a theory of how the economy works and is confounded that people aren’t acting that way, he’s saying that he has a theory of how rationality works. The fact that he reacts to people acting irrationally with confusion (rather than on the one hand acknowledging that people make mistakes or on the other hand trying to analyze what people are thinking) is a sign of some flawed ways of thinking, but it’s not the flaw you’re describing.

Wow. As a graduate student, you just described 95% of the conversation and facebook posts of my fellow Teaching Assistants. The whole lot of them love school and have done well at it. They have no understanding of what it might be like for an 18 year old to struggle in a)A new, independent environment and b) schoolwork, so all I hear are “stupid” questions and exam answers.

I’ll tell you what cured me of this — taking Aikido. It was the first place that (a) I was the worst student in the room and (b) I absolutely could not learn the skill, no matter how hard I tried — and I did try.

My sensei and my fellow students were extremely patient with me, showing me the moves over and over, and eventually I would learn basic things, very badly. But after a year and a half of watching small children and beginners learn rapidly and perfectly in a week what took me months to learn badly, I gave in.

Now when I see my students struggling with grammar or writing paragraphs, I don’t think, “What is WRONG with you ijits?” Instead, I remember trying to get that shoulder roll, and how I just couldn’t even *see* what my sensei was to show me.

Yeah I think I made this connection once when a former schoolmate contacted me on Facebook after I had voiced how much I had hated PE because of being so bad at sports and said “this is how I felt in all the *other* classes” and it was just an Aha moment for me. If we all have obvious things we are bad at it seems like we could make this connection. But I guess the ego naturally wants to feel superior.

I luckily learned this in kindergarten. I could already read, and in our play grocery store, I made change correctly and would not sell fake food to kids who didn’t have enough play money. I was valedictorian of the kindergarten!

PE was it for me. I know how it is to JUST NOT BE ABLE to apply all the helpful advice people are giving me. “Hit the ball with this part of your hand!” OK, I can’t make my body do that. And I can well understand how someone told to factor a polynomial could just freeze up.

I started taking guitar lessons this year. When I was a kid, I took piano and played clarinet. I was beyonnnnnddd terrible, and I was worse at all sports. I just did not have a right brain at all. My teachers at that time were uniformly of the “any idiot can do this you twit!” school of motivation, so I gave up. Now, at 50, I find that if I take things slowly I can learn to play rather well, and my teacher works with me to find ways around the things I can’t do. (I have short stubby and stiff fingers, which means guitar chords are horrible for me.) I’ve also taken horseback riding lessons and learned to ski and play golf with some measure of skill, thanks to patient teaching. This has made me a more interesting and generally better person.

I just got a letter about this very thing from Hilary Rettig who posts occasionally at Balloon Juice under her actual name. In real life she seems to be a writing and life coach. Anyway, she sent me one of her newsletters and it contained a fascinating essay by a math coach about just this issue, as well as a link to a great Harvard Graduation speech from J.K. Rowling. Both are really worth reading.

I think this so more common than the alternative. Most people find it impossible to imagine that other points of view exist, and they therefore conclude that all disagreements come from ignorance or malice.

Oh jeez, you just described one of my serious pet peeves (I am also a grad student and TA).

I barely made it through as an undergrad – I was at a school known for being academically brutal (and didn’t come from as well-prepared a background as some people), I had an undiagnosed sleep disorder that was leaving me a physical mess, I was dealing with major family stress that was leaving me a mental mess, and frankly, my study habits weren’t particularly developed because I had never needed them to do well before. I don’t just mean “spending enough time studying” – I actually did spend a lot of time studying, but I had no clue how to study in ways that were effective. The reason I was able to get into a PhD program at all was that after I graduated I spent five years working junior researcher jobs in my approximate field while taking non-degree classes part-time and then doing a master’s part-time.

I have, in the past, gone into a firebreathing fit of rage about a TA (not at my school, a friend of an undergrad friend) mocking struggling students. I also see both professors and grad students doing it on the CHE forums and it’s unpleasant, even when lighthearted and not meant to be malicious. It makes me imagine what professors and grad students might have said about me as an undergrad. I feel more like the people they’re disrespecting than I feel like them.

On the plus side I hope this will all make me a better teacher in the long run.

This. My parents were single income, lower middle class, and they used the layaway at Kmart for all of my Xmas presents. They didn’t have credit cards, and always had their Xmas shopping done by October. My dad had grown up pretty poor, and buying nice Xmas presents for me was how he showed his love to a brainy, snotty son with whom he didn’t have anything in common.

Tabbork makes a good point though, that perhaps consumer protection groups shouldnt be pushing these programs
As to the rational actor model, Tabbork might be one of the last true believers that its an all encompasing literal view of human behaviour, but most economists dont claim that (and even the most retrograde elements are being complicated by behavioural economics )

They may be pushing them as an alternative to store credit cards or check-loans. In that case, the potentially lost money from breaking layaway is far, far less of a problem than the potential debt spiral.

Layaway is a much more economical alternative to rent-to-own places like Aaron’s or Rent-a-Center. You don’t get to use the item you’re paying towards until you’ve paid off the balance, but then neither are you paying something like $2000 for a $500 computer for your children’s homework.

My credit union is old-school and still has a Christmas Club. A local nonprofit here offered matching last year, if the low-income people whose tax returns they filed put some of their return into savings. Either of these programs would be excellent public programs (including the free tax help, truthfully – why should private industry profit off something so inherently public as taxation?). Even the post office banking like the UK has would be very helpful.

what I mean is he’s a true believer in a very limited, cariatured view of rational behaviour..which is odd, and worrying (beause I dont think most, even bog standard, economists actually hold such a view)

I’m just skipping down to say what a great post this was, Erik. Just so empathetic and deeply responsible to the real issues facing people, especially poor people, that make them choose to particpate in a rigged game because its the only game available to them.

When I lived in Egypt it was a real common thing for neighbors to form savings clubs where they contributed small amounts to a pot, and took turns getting the pot. Since there was no interest and the person agreeing to take the pot last could have just put the money in the bank I had a lot of people here in the States asking me what on earth the point was. Well it’s forced savings for people who live without a cushion for their finances, and yes it works for that big purchase you want to make at a certain time (holiday presents, or saving for a trip to Mecca, or a wedding, or a washing machine, or whatever). There is a very interesting anthropology study by an Iranian woman whose name escapes me called “Marriage and the Market” about economic behavior in poor Cairo neighborhoods, that was just fascinating to me after 5 years of living in one of those neighborhoods and having a foreigner’s “what a weird and seemingly irrational thing to do” attitude towards a lot of their coping skills.

My family was one of those families that was poor in the sense of not having a lot of money and getting government surplus dairy products and our school clothes at goodwill, but I never remember us using layaway – I think when I look back on it and when I hear stories from my partner who helps homeless people find housing, about all the financial problems the poor have, that I didn’t actually have it that bad. It is depressing how many people have to struggle so hard and still can’t get away from this marginal existence. I am with Joe C. above. It is just wrong that people have to live like this and then get moralized at by an idiot who exemplifies what “ivory tower” refers to.

These savings clubs are very common all over the middle east and west africa, I think, and they are (in some sense) the mothers of the grameen bank model. They are a very sensible way of organizing savings and cooperative behavior among people, especially women, who are forbidden from accessing normal bank forms of savings and loans. There’s a great children’s book, the name of which I can’t remember, about a similar practice among recently immigrated jews on the lower east side in which people would organize to raise and share money simultaneously. EAch person would go into the room and put money into a pot,and some would go in and take it out but no one was to know who did what when so no one would be shamed. I forget the name of the practice and I don’t know how widespread it was. This was a form of charity, of course, and not forced savings.

Btw in the african models these groups do have a form of built in interest, IIRC, at least for the non muslim communities with people who pull the money out earlier getting slightly less than people who come later in the cycle.

Savings clubs also exist in immigrant and poor communities in the USA. I was puzzled, probably like most middle class people, when I first encountered it, but it works quite well among social groups where there’s sufficient connections to build trust and insufficient means to access normal savings methods.

It’s similar to the layaway. People in poverty have trouble saving up large chunks of money yet they still have situations hewer they need to spend a large chunk of money at once. Savings clubs provide a means to do this.

some Chinese immigrants reportedly did the same thing with fancy dinners. Every month a different person hosted a nice, big fancy dinner for the other 11 members of the group. So you shelled out for one big dinner, but got to eat 12 of them over a year.

These savings clubs are also fairly widely used in the U.S. there was a Marketplace (I know, I know) podcast about this a few weeks ago. It can be a very helpful social tool for lots of people in a variety of circumstances. A major disadvantage is that people using these savings clubs aren’t building their credit history.

My family was much the same. We used layaway now & again. More so in the ’70s, less so in the ’80s when we were relatively better off. I was glad when it made a come back a few years ago tho. Layaway is a good system for certain things for all of the reasons mentioned above & its a damn site better than EZ credit.

To me, the way to look at layaway isn’t to compare it to putting money in a piggybank, but to look at what really replaced layaway for a long time: credit cards.

I don’t recall what my parents bought on layaway, but I think it was stuff like winter coats that went on sale in September when it wouldn’t get cold until November or December. But as the 1970s went on, my parents qualified for store credit cards, and then bank-issued cards. They still didn’t use plastic a lot, but with the cards they didn’t need to put stuff aside.

As the 1980s and 1990s wore on, credit cards were extended to more people — even people who (like, ahem, me) didn’t have any talent managing their finances. The implication was clear: instead of making small payments into savings and then make the purchase, we were encouraged to make the purchase first and then make small payments. That worked to the advantage of the retailers and the finance companies, but for people who were making the credit card payments (or not) it was a much worse deal.

Layaway isn’t the optimal way to finance purchases, but from my experience “optimal” doesn’t really apply when you’re constantly crunched for cash. And it may beat getting swamped with debt that can become almost impossible to dig yourself out from.

It’s an even bigger omission when you consider the terms on kinds of credit cards extended to people with little to no, or checkered credit histories can get. Wasn’t there a time when usury was considered immoral?

It isn’t just people with bad credit ratings. My husband has managed to reach middle age with a spotless credit history, but some of the CC offers he got from banks were one step BELOW a loan from Knuckles McLoanshark. It seems to have eased up since the housing bubble went boom. Or maybe like me he now throws them out unopened.

As for the immorality of usury, the Right has transferred the sin from making to accepting the offer. It isn’t the banks fault so many horrible poors took that ethically questionable deal.

It isn’t just people with bad credit ratings. My husband has managed to reach middle age with a spotless credit history, but some of the CC offers he got from banks were one step BELOW a loan from Knuckles McLoanshark.

You husband probably gained his spotless record by not charging very much to begin with and then paying it back before the interest kicked in. Those companies people like you to charge often and keep a balance on their books. Then they’ll extend you more and more credit at slightly better rates.

As for the immorality of usury, the Right has transferred the sin from making to accepting the offer. It isn’t the banks fault so many horrible poors took that ethically questionable deal.

Right. Like how the victims of predatory housing loans/refinances were the real culprits, not the predatory lenders. Jesus, this kind of shit really pisses me off — institutionalized greed is the backbone of America.

Right. Like how the victims of predatory housing loans/refinances were the real culprits, not the predatory lenders.

It couldn’t be legitimate usury because nature has a way of shutting that thing down.

I think this is where the economic psychobrains would declare that the Consumer is responsible for becoming an expert on everything that involves money and it is their fault if something bad happens, because they didn’t Educate Themselves. (Something I often hear in regards to “choosing” health care and it really makes me want to harm people.)

I recently spoke to a woman who had been involved in the housing loan industry here in Maryland (where we’re all commies and regulate the hell out of everything) she stopped being involved when she was pressured to do things like create fake pay stubs for applicants and convince them it was OK.

But if you tell the EPs this they insist it is the buyer’s fault for believing the lie. It isn’t even about assigning blame, it is about kicking people who are down and bleeding.

You’ve just described my early working career. I couldn’t get a job using my degree (Economics ironically) and had built up good amount of credit card debt. I got a job working for a small one CPA accounting firm and eventually passed the CPA exam and my circumstances are better now. However I spent years working my way out from under that debt. If I had ever had a health emergency, I’d have been wiped out. But I was lucky.

I got hit with a bunch of potentially life-destroying events — four consecutive years of four-figure incomes, lack of health insurance, student loan payments, hefty credit card debt, serious health event during unemployment — but by sheer luck they didn’t occur simultaneously. For instance, by the time I had my heart attack (age 35), while I was unemployed, I had insurance thanks to the COBRA law. And while I ran up some credit card debt, it wasn’t until after I had a steady full-time job.

But all this has scarred me, making me super-leery of debt. After I finally paid off my credit card debt, I’ve worked to pay in full every month since. When I refinanced my mortgage a couple years ago, instead of re-upping for another 30-year mortgage with lower monthly payments, I kept the monthly payments roughly the same and opted for a 15-year mortgage.

And I’ve developed a low tolerance for people who try to turn poverty into a moral failing. I know that I’ve never been poor in the sense that the options of the world dwindle down to just a couple bad ones. But I’ve been a fellow traveler and know that I was just one bad day away from all that.

I know what you mean about being leery of debt. Ever since I got out from under the credit card balances, I have never let a credit card bill go by without paying the full amount. If I want a big item purchase I save for it if I have to, charge it to the CC for the points, then pay off the entire balance the following month so I don’t pay the ghouls one cent of interest.

When I had to replace my car last year, I got a five year loan so the payments would be lower, but paid more each month so I’d have it paid off about half that time and made up my monthly budget assuming that the higher amount was the real loan payment. I figured that I suffered a setback, I’d be able to revert to the lower payments.

Good explanatory article. I don’t understand why he waves away the credit card parallel. Layaway seems much better than a credit card and credit cards are in fact how the middle class makes quite a few big purchases

I wondered that as well. My completely wild guess – He has credit cards and so that is totally OK and rational. (What he would say about a poor person with a credit card remains a matter of speculation.)

Erik: “What bothers me about articles like this is the lack of understanding of working-class behavior. Tabarrok can’t understand why people would use layaway. But it’s easy to gain that understanding. Ask some poor people why they use it. ”

He’s a George Mason Kochwh*re; his whole job is to f*ck over 90% of the American people. He doesn’t really need to understand that much except for what buttons to push.

Instead of lending Walmart money, get yourself an old-fashioned piggy bank and avoid the cancellation fee and the hassle of going to the store to make the periodic payments.

People who choose layaway are availing themselves are a different kind of piggy-bank, one that provides a set of incentives to help/encourage them to stick to the savings schedule that will allow them to make the purchase.

‘Why don’t you just get a piggy bank?’ is sort of like ‘Why don’t you just order the salad at McDonald’s?’ Yes, Dr. Economics, that option is, indeed, possible. Can we talk a little about human beings now?

Not only is layaway safer in protecting you from yourself, it also protects you from other people. The money is a lot safer at Target than it is in a piggy bank where it’s vulnerable to your spouse/boyfriend/teenager, etc.

This. Also, it is safe from relatives applying pressure for you to help other relatives. It makes it easier to say, “I’m sorry, but, I can’t.”
Your mom or dad calls you and says that your brother needs 500 dollars for x reason? “I’m sorry, I don’t have the money to do that.” So, your kids get their winter coats or a present and family harmony isn’t shattered.

What I took away from this article is that it’s just another attempt to shift the blame for the desperate condition of the working poor onto their own shoulders and their defective decision-making. You people are poor, not because of globalization or outsourcing or program cuts or the New Gilded Age or the collapse of unions, but because you do stupid things like buy shit on layaway! Instead of hassling your betters for a second helping of gruel, you need to start making smarter decisions! McMegan does a lot of these, too.

There’s also their close cousin, the article about how poor people aren’t really poor because 98% of them have access to a refrigerator! And some of them own cellphones! Why, the ten richest kings of medieval Europe couldn’t have imagined such luxuries.

Some people above have commented on the way people with precarious incomes can be hit not only be their own sudden unexpected needs, but also by those of dependants, or those who have a claim on them. And so layaway becomes a way of ensuring that there is some portion of money which is not available to be ‘claimed’.

That sounds perfectly rational.

The equivalent in Senegal was the array of barely-begun, half-built and totally-unfinished houses I used to walk by every day. It was explained to me that, if people came into money, they would put at least some of it into a plot of land/house if they could do – avoid it all being sucked away in other peoples’ requests.

Yes, this was also true in Egypt where people would buy, first the land, then build a foundation, then build some other piece, but making sure that they were sinking their savings into the real estate where it would not be claimed, and would be a later investment for the whole family – the idea being that eventually that building on that land would be the whole family’s.

The Egyptian case was a bit more complicated due to a strange property tax law in force from 1954 to 2010 cite:

6.(U) An important element of the new tax is that it will be levied not only against completed buildings but also against projects under construction to encourage completion of projects and the sale or rental of empty units. The prior real-estate tax exempted unfinished construction from the tax, and as a result, many buildings in Egypt have an unfinished top floor that has been “under construction” for decades which is used as justification for tax-exemption.

Eric, thanks for posting this. Poor people, working people, and middle class people are not irrational. We are all making the best decisions that we can given the constraints placed on our lives by our own actions, but especially those foisted upon us by our so called betters. I pretend to understand the economic and social circumstances of my life and my family’s lives, but I really don’t.

I’m so stunned that Tabarrok didn’t even do a cursory evaluation of the costs of layaway (which as Kevin Drum pointed out are quite small). In fact it makes me wonder if he’s mentally jumbled layaway with much more predatorily-priced arrangements like rent-to-own.

Shopping for clothes when I was growing up was brutal. We went to town and went to all the department stores except the high end ones because all had some form of cheaper clothes. I was dreadfully skinny and cheap clothes can look bad on anyone, much less a stick. My mother didn’t drive and my father would take us and we’d spend all Saturday going from store to store and then back to the first one because we were trying to get the absolute best deal for the money we had. And at the end of the day, some of it would be on layaway.

Layaway meant my father could stop by and pay for it and we wouldn’t all have to be there. Layaway meant that the one thing that sort of fit was MINE and I would get it some time in the future. I had all the anticipation of that beautiful coat, way before I had it to wear. Recent happiness studies say that we should all be trying to maximize anticipation because of its link to happiness. Forty plus years later I can close my eyes and see that coat. It was a girl’s single-breasted chesterfield, grey herringbone with a black velvet collar. I waited and waited and when it finally came home, I felt like the queen. The Sears catalog and layaway is how I got most of my participation in the Great American Consumer Culture and how I was able to pass for mostly middle-class in school thus taking some ammunition from the bullies.

And it’s absolutely true that the anticipation of something is usually more enjoyable than having it (of course, the moment of receiving it is best of all). I will often put off the purchase of an item I don’t really need, just to drag out the anticipation.

Thank you for this. One thing that I think people forget, now that it all comes from far away, is that clothing used to be much more expensive relative to other goods. In some cases, storebought clothing was a luxury — my mom sewed several shirts I wore in elementary school following Simplicity patterns. To get something new was a big deal.

This whole thread is making me reconsider how I think about my childhood.

That’s probably more polite, since we generally regard the hopeful more highly than we do the innumerate.*
Still, “hope tax” can sound pretty condescending, too. “A tax on those suckers who haven’t realized the fix is in,” in other words.
I doubt you meant it that way, Anna – more like “a tax on those folks who retain some optimism in the face of seemingly insurmountable odds?” That’s pretty much how I see it.

I do not think it is an insulting or mean assumption on your part – I think sometimes we (I) can be condescending without meaning to. In my case I think I lost my condescension slowly, as I got older, and learned on a deeper level that my motivations are not everyone’s – and therefore became increasingly self-critical about rushing to judgment (I am a naturally evaluative person as far as Myers-Briggs categories go).

I am personally very risk-averse and don’t like the idea of buying lottery tickets any more than the idea of gambling, but I now understand that it’s a pleasurable form of entertainment for others, and it’s just as valid as spending that money on any other entertaining thing.

This need for security also applies to mortgages. I resist all sorts of wealth-enhancing re-fi plans because I want to pay off the mortgage! I don’t care about lower interest rates. I don’t care about cutting my monthly payments in half. I don’t want to borrow more than I need (I supposedly had the highest credit rating the mortgage loan officer had ever seen).

I remember getting in trouble in 7th grade. This kid said his father owned a check cashing place and I sarcastically said it was “a noble profession.” I don’t know how I let school beat the smartass out of me but I’ve been working on it ever since. Fuck that guy and fuck Tabarrok twice with a rented dick and a used condom.

When I was in high school I had two friends, sisters whose dad was unemployed for a long time and whose mother only worked part-time. They both worked and were expected to give most of their paychecks to their parents to pay the bills. They got to keep a small amount for spending money.

Technically, they could have saved that money for clothes, but actually, whenever they saved money it always got “borrowed” for some parental need. So buying clothes on layaway was the only way they could be sure of getting anything for themselves.

I grew up in a working class family. our financial situation was always a careful balancing act. layaway programs provided us an opportunity to buy items we would otherwise have a hard time affording.

I am now a lawyer. I am reminded of a discussion about income tax refunds in my tax class in law school a few decades ago. I pointed out to the tax law professor that working people often view tax refunds as a form of “savings.” My professor was shocked that people would “lend” money to the government for free. Working people generally don’t have the option of lending or not lending money to the government; they just hope they get a big refund come tax time.

Used car dealers (always the “practical” economists) whose customers are workers know that sales go up in April and May when people get their tax refunds.

May I simply just say what a relief to discover someone who really knows what they’re talking about online.
You certainly understand how to bring a problem to light and make it
important. More and more people really need to check this
out and understand this side of the story. It’s surprising you aren’t more popular because you
definitely possess the gift.

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